What is the marginal tax rate?

1 min readLast updated November 10, 2023by Rachel Carey

Discover the essence of marginal tax rates, including calculation methods and alternative financial planning approaches, in this comprehensive guide.

What is the marginal tax rate? 

Very simply, the marginal tax rate is the level of tax that you need to pay on the last dollar you earn in the tax year. In the US, income tax is progressive, meaning that the more you earn, the higher your marginal tax rate will be.   

When filing your tax return and calculating exactly how much you will need to pay, it’s important to understand how the marginal tax rate works.  

The amount of income tax you pay will vary depending on your circumstances. However, calculating your marginal tax rate in advance can help you plan and even minimize the taxes you pay. So, rather than leaving your finances to chance, let’s look at how you can figure out your marginal tax rate.  

How do you calculate your marginal tax rate? 

Your marginal tax rate depends on your income and your filing status. There are seven different income tax brackets, ranging from 10 percent to a maximum of 37 percent. However, you may find that filing your tax return as an individual, head of household, or married couple can affect which tax bracket you fall into. 

To calculate your marginal rate, you need to know your total taxable income for the year, your filing status, and the different income tax brackets. With this in mind, calculating your rate is relatively easy. You simply need to match your total taxable income to the various tax brackets available.  

For example, based on income tax brackets for 2022/2023, if you earn $30,000 as a single filer, your marginal tax rate will be 12 percent of the amount over $11,000.  

Examples of marginal tax rates 

To give you a more concrete example, let’s say that in a year, you earn a total of $60,000 and file your taxes as an individual.  

The first $10,275 of your income falls into the ten percent tax threshold.  

The next tax threshold at 12 percent covers your next $31,500.  

Finally, the remaining $28,500 falls into the 22 percent bracket.  

In this case, as the last dollar you earned was taxed at the 22 percent threshold, your marginal tax rate is 22 percent.   

Marginal tax rate vs. effective tax rate 

The marginal tax rate isn’t the only measure of tax you can use.  

The effective tax rate is the percentage of your income that you pay as tax. This is often lower than your marginal tax rate as most people tend to pay income tax at lower brackets. To calculate your effective rate, you divide the total amount of tax you have paid by your total taxable income. Using the example above, a single filer earning $60,000 pays a total of $11,077.50 across three different tax brackets. Divide this $11,077.50 by the total taxable income of $60,000, and you will be left with your effective tax rate of 18.46 percent.   

As the marginal tax rate only reflects the highest rate of tax applied to your last dollar, this tax calculation is often only useful for people in higher tax brackets. As most taxpayers tend to fall into the lower brackets, calculating your effective tax rate may be more useful.  

Marginal tax rate vs. flat tax rate 

Marginal taxes mean that those who earn more also pay more taxes.  

On the other hand, a flat tax rate is a single tax that everyone, regardless of their income, pays. Flat tax rates are often criticized as they result in both lower and higher-income individuals paying the same level of tax rather than creating a more graduated system where wealthier individuals pay more. 

For this reason, marginal tax systems are preferred by many governments around the world. However, countries such as Greenland, Lithuania, and Georgia all operate a flat tax system, with the tax rate ranging from 16 percent to 45 percent.  

The marginal tax rate is the highest level of tax that you pay. Although calculating your marginal rate is important and can help you plan your finances, it isn’t the only measure you can use, so make sure you know which calculation is best for you. If you need help managing your taxes and planning your financial goals, speaking to a financial advisor can help you set things straight.  

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Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.